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What is the expected return on Dunder Mifflin’s stock? What is the weighted average cost of capital for Dunder Mifflin ?

What is the expected return on Dunder Mifflin’s stock? What is the weighted average cost of capital for Dunder Mifflin ?

EBK CONTEMPORARY FINANCIAL MANAGEMENT
EBK CONTEMPORARY FINANCIAL MANAGEMENT
14th Edition
ISBN:9781337514835
Author:MOYER
Publisher:MOYER
Chapter14: Capital Structure Management In Practice
Section14.A: Breakeven Analysis
Problem 8P
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What is the expected return on Dunder Mifflin’s stock?

What is the weighted average cost of capital for Dunder Mifflin ?

 

NO using excel only by formular 

Dunder Mifflin is a paper manufacturer and distributor which is investing in a new line of paper. The company needs to buy the building for US$50 million and make an initial investment of US$30 million to convert the building into a plant. Expenses are incurred today (t=0). 10 years is the expected life of the plant. The company is estimated to make sales of 1 million units per year for all of the 10 years. Fixed costs and variable costs are US$10 million each year and US$20 per unit (one ream) respectively. The company's executives have decided to set a sales price of US$30 per unit. Assume that people who buy the new paper would be new customers, i.e. introducing this paper to the market would not affect the sales of their other products. All the expenditures made for the plant today will be depreciated straight-line over 10 years (from year 1 to year 10) leaving behind a value of US$5 million, but the company believes it might be able to sell it off at US$10 million. The company has a beta of 1.75; it is 60% financed by debt, and debt holders require a 10% rate of return on their investment. Taxes are 40%. The interest on short-term government bonds is 4%, while the market rate of return is 8% and is expected to continue.
Transcribed Image Text:Dunder Mifflin is a paper manufacturer and distributor which is investing in a new line of paper. The company needs to buy the building for US$50 million and make an initial investment of US$30 million to convert the building into a plant. Expenses are incurred today (t=0). 10 years is the expected life of the plant. The company is estimated to make sales of 1 million units per year for all of the 10 years. Fixed costs and variable costs are US$10 million each year and US$20 per unit (one ream) respectively. The company's executives have decided to set a sales price of US$30 per unit. Assume that people who buy the new paper would be new customers, i.e. introducing this paper to the market would not affect the sales of their other products. All the expenditures made for the plant today will be depreciated straight-line over 10 years (from year 1 to year 10) leaving behind a value of US$5 million, but the company believes it might be able to sell it off at US$10 million. The company has a beta of 1.75; it is 60% financed by debt, and debt holders require a 10% rate of return on their investment. Taxes are 40%. The interest on short-term government bonds is 4%, while the market rate of return is 8% and is expected to continue.
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In class we use this formular can you calculate the second question with that?

Btw you can type on a computer I'm just not allowed to use Excel

WACC = E [*(1 - Tc) debt] + (* Tequity)
Transcribed Image Text:WACC = E [*(1 - Tc) debt] + (* Tequity)
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